Principles of Macroeconomics

| March 13, 2016

Part 1: Assume that the country is in a period of high unemployment, interest rates are at almost zero, inflation is about 2% per year, and GDP growth is less than 2% per year. Suggest how fiscal and monetary policy can move those numbers to an acceptable level keeping inflation the same. What is the first action you would take as the president? As the chairman of the Fed? Why? What would be your subsequent steps? Make sure you include both the positive and negative effects of your actions and include the trade-offs or opportunity costs.

Include the following concepts in your discussion:

Demand and supply of money
Income and Productivity
Interest rates
The Phillips curve
Taxation
Government spending
Wages
Aggregate supply
Aggregate demand
Long run and short run
Costs of inflation
The multiplier and the tax multiplier
An open vs. a closed economy
The idea of tax rebates to stimulate the economy

Part 2: Assume the country is in a budget deficit and carrying a very large debt. Discuss the dangers of a high debt to GDP ratio and a growing budget deficit. Would this change any policy changes you discussed in Part 1?

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